Shareholder Agreements – A Guide to Successful Exit Strategies

Jan 17, 2025

1015 words | 5 mins
By Paul Salvatore, Mann Lawyers

Let’s say you have a brilliant business idea you’re looking to execute. One of your first thoughts might be to set up a corporation rather than operate your business as a sole proprietorship or partnership.

When planning for the setup of your corporate entity with two or more shareholders, careful consideration should be given to the preparation and implementation of a well-drafted shareholders agreement among all the shareholders of the corporation and the corporation itself.

This can either be a simple or complex document that should cover required shareholder approvals for major business matters and also addresses the permitted disposition of shares through various buy-sell arrangements that might change who owns the shares.

Even if disputes among shareholders are rarely contemplated at the outset of a business setup, disagreements do arise among shareholders during business operations – and can be difficult to resolve.

In case of deadlock

If shareholders are unable to settle their differences, a deadlock may arise which can negatively impact your business operations and result in financial instability of your company.  In the absence of a shareholder agreement, there may be no easy way to compel a shareholder to sell its shares, reinforcing its importance in helping to resolve disputes that may develop.

A few considerations  

  • Articles of incorporation generally require the approval of a majority of the directors or shareholders to transfer shares from one party to another, but a shareholder agreement can provide a roadmap for the transfer of shares.Normally, a shareholder agreement will specify that no shares may be transferred or encumbered except as permitted by the shareholder agreement.  A shareholder agreement can then provide for several exit strategies, allowing a shareholder to transfer its shares in an orderly manner to an existing shareholder or a third party.
  • Shotgun buy-sell provision: If you and your fellow shareholder each own an equal number of shares and you are each possessed with approximately equal financial resources, consideration should be given to the inclusion of a shotgun buy-sell provision in your shareholder agreement.The shotgun buy-sell, sometimes referred to as Russian Roulette is an effective way to end a deadlock among shareholders. A typical shotgun mechanism in a shareholder agreement permits one shareholder to send a written offer to the other shareholder containing an offer to buy the other shareholder’s shares and an offer to sell all of the shares of the shareholder making the offer to the other shareholder at a predetermined price.The shareholder receiving the offer can either accept the offer to sell its shares or can compel the shareholder who sent the offer to sell that shareholder’s shares on the same terms and conditions as contained in the original offer.

Other common exit provisions for permitting a voluntary share transfer through a shareholder agreement

The hands of two people seated in a discussion over a document. One is holding a pen.

Perhaps the most popular is the right of first refusal offer in which a shareholder is given the opportunity to buy the shares from a shareholder who wishes to sell its shares.

If the shareholder receiving the offer is unable or unwilling to purchase the shares of the selling shareholder, then the selling shareholder is permitted to locate a purchaser and sell the shares to a third party on the same terms and conditions.

A similar provision, the right of first refusal, can also be drafted whereby a selling shareholder first obtains an offer for the purchase of its shares from a third party, and in such instance, the selling shareholder is then required to allow the other shareholder to purchase the shares on the same terms and conditions that as are contained in the third-party offer.

If the offer is not accepted, the seller may then proceed to sell its shares to the third party.

If you are a majority shareholder possessing voting control and you receive an offer for the purchase of all the shares of the company which you wish to accept, you should consider the inclusion of drag along or carry along rights in the shareholder agreement.

Such a provision can compel a minority shareholder to sell its shares at the same time and on the same terms as stated in the third-party offer to the majority shareholder.

For a minority shareholder, piggyback rights or what is also referred to as tag-along rights should be considered. Under this provision, whenever a majority shareholder offers to sell its shares to a third party, the minority shareholder may also offer its shares to that third party as well, on the same terms, and the third party cannot purchase any shares unless it purchases all of the shares offered on the same terms.

In the event of..

Lastly, there are certain triggering events that should be contemplated requiring a shareholder or the estate of a deceased shareholder to sell shares to the current shareholders or providing an option for the company to repurchase the shares at a predetermined price, or based on a valuation by a chartered business valuator, the company’s accountant, or based on another valuation mechanism.

These events can include:

  • the death or bankruptcy of a shareholder
  • the physical or mental incapacity of a shareholder
  • the retirement of a shareholder
  • or a shareholder who experiences a marital breakdown.

The wide range of exit strategies requires careful consideration by shareholders with the assistance of the company’s legal counsel. A well-drafted shareholders agreement will provide a satisfactory way forward among shareholders and avoid costly disputes down the road.


Searching for legal advice and more resources?

We know navigating business structure, contracts, and insurance can be difficult, especially if you don’t have a business background.  If you’re looking for advice tailored to your business, our experienced partners at Mann Lawyers provide legal support for businesses of any size.

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